Case 1

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Rev. Jul. 31, 2018
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Trump Says the WTO Is a Disaster
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The three-quarters of a century since World War II had experienced relatively smooth economic expansion,
interrupted by a few recessions and the Great Recession, but no major depression.1 Economic growth tended
to support liberalizing international trade. It muted demands for protectionism, created opportunities, and
attenuated structural adjustment pains associated with freeing up trade. Overall, since 1945, world trade had
grown faster than world output (see Exhibit 1). After the stalling trade negotiations of the early 1980s and the
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“new” protectionism after the second oil crisis, the 1990s stood out as years of accelerated trade growth with
accelerated integration of emerging economies into the world economy.2 In spite of strong growth and low
unemployment, however, the 1990s experienced significant pushback on trade. The decade started with lively
discussion about potential job losses due to the North American Free Trade Agreement (NAFTA), or, in the
words of US presidential candidate Ross Perot, its “giant sucking sound.”3 The 1990s ended with violent
protests by opponents of the World Trade Organization (WTO) in Seattle, Washington, and a call to safeguard
labor and environmental standards, especially in deals with emerging countries. It is worth noting that those
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protests happened before China entered the WTO, and before the financial crisis hit the world economy in
2007, which at least temporarily reversed the expansion of global trade.
In 2017, it was a challenge to assess the future of global trade. It was an open question whether the financial
crisis and the recession that it triggered would mark a turning point for the liberal post–World War II world
order. If one looked toward Europe, China, Latin America, and Japan, there was a flurry of activity. New trade
agreements were being completed and pursued. In Washington, DC, on the other hand, Donald Trump seemed
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set on ripping apart and/or renegotiating any trade deal the United States was ever part of. A veteran trade
negotiator attending the festivities for the 70th anniversary of the General Agreement on Tariffs and Trade
(GATT) on October 30, 2017, summed up the confusion best: “This feels more like a wake than a birthday
party.”4
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1 The title of this case refers to presidential candidate Donald Trump’s remarks on Meet the Press, July 24, 2016, https://www.nbcnews.com/meet-the-
press/meet-press-july-24-2016-n615706 (accessed Dec. 15, 2017). This case is best read together with a technical note: Peter Debaere, “A Theory of
GATT/WTO,” UVA-GEM-0153 (Charlottesville, VA: Darden Business Publishing, 2018).
2 Note, however, that the debt crises and the adjustment programs (often under the auspices of the International Monetary Fund and World Bank)
did push trade liberalizations in developing countries. Free trade and capital movements were an integral part of the Washington Consensus that would
only in the wake of the Asian Financial Crisis at the end of the 1990s be (somewhat) relaxed. See Dani Rodrik, “The Limits of Trade Policy Reform in
Developing Countries,” Journal of Economic Perspectives 6, no. 1 (1992): 87–105.
3 “NAFTA 20th Anniv – Perot Giant Sucking Sound,” YouTube video, 0:34, posted by “CNN,” July 21, 2016,
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https://www.youtube.com/watch?v=W3LvZAZ-HV4 (accessed Jan. 30, 2018).

4 Shawn Donnan, “Fears for Global Trade as Trump Fires First Shots to Kneecap the WTO,” Financial Times, November 10, 2017.
This case was prepared by Peter Debaere, Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate
effective or ineffective handling of an administrative situation. Copyright  2018 by the University of Virginia Darden School Foundation, Charlottesville,
VA. All rights reserved. To order copies, send an email to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval
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This document is authorized for educator review use only by AJAY CHANDEL, Lovely Professional University until Apr 2021. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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Contradictory Signals
Japan, with the backing of Mexico and Canada, had been working hard on TPP-11 in 2017. TPP-11 stood
for the Transpacific Partnership that 11 Pacific Rim countries continued to pursue after US withdrawal in early
2017. Japan, China, India, South Korea, Australia, and New Zealand pushed for the Beijing-led Regional
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Comprehensive Economic Partnership (RCEP)—a free trade agreement with 10 other countries from the
Association of Southeast Asian Nations (ASEAN). As for the European Union (EU) and its single market of
28 countries, it had just concluded a free trade agreement with Canada and had agreed in principle on a deal
with Japan. The EU was keen on launching separate negotiations with South America’s customs union,
Mercosur, as well as with Australia and New Zealand, and was intent on updating its deals with Mexico. It was
hard not to see this activity as a response to the election of Trump.5
On January 20, 2017, Trump assumed the US presidency. His nomination as Republican candidate and
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subsequent election had taken many by surprise. In a country still marked by the 2007 financial crisis, the
political novice and reality TV star’s promise to “Make America Great Again” hit a popular nerve. Like the
campaign by Bernie Sanders, one of the Democratic contenders, Trump’s campaign tapped into public anger
at the establishment and rising income inequality.6 His unconventional and sometimes vulgar and profane
campaign had been short on policy briefs.7 It was fueled by anti-immigration and antiglobalization sentiment,
as well as America’s culture wars over LGBT rights, the Second Amendment, political correctness, and
perceptions of a biased, liberal media.8 One of the most popular lines in his campaign was the chant to “build
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a wall,” a promise to seal the border with Mexico and reduce (illegal) immigration. While Trump’s style was
unique, and while international circumstances varied, the call for independence from Spain in Catalonia, Brexit
(the decision for the United Kingdom to leave the EU), Scotland’s referendum for independence, and extreme-
right politician and presidential candidate Marine Le Pen’s initial pledge to have France leave the EU’s
Economic and Monetary Union (EMU) suggested a common theme that brushed against the grain of
(international) integration.9
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Trump’s statements on international trade and the global economy especially raised eyebrows abroad. While
the campaign rhetoric by both Democrats and Republicans had been very critical of free trade and trade
agreements, Trump stood out for how much he embraced America-first policies. Candidate Trump promised
to undo outsourcing and bring manufacturing back, which appealed to the Rust Belt (see Exhibit 2). He vowed
to end the “war on coal” that, according to him, had been perpetrated by the “hoax” of climate change, and
railed against bad trade deals that gave the United States its persistent account deficit (see Exhibit 3).10
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5 Shawn Donnan, “Globalisation Marches on without Trump,” Financial Times, November 6, 2017.
6 Susan Page and Brad Heath, “How Anti-Establishment Outsider Donald Trump Was Elected the 45th President of the United States,” USA Today,
Nov. 9, 2016, https://www.usatoday.com/story/news/politics/elections/2016/11/09/election-analysis-hillary-clinton-donald-trump/93198882/
(accessed Jan. 30, 2018).
7 For more on candidate Trump’s vulgar language, see Jacqueline Alemany, “Donald Trump Rolls Out the Expletives at Portsmouth Rally,” CBS
News, February 5, 2016, https://www.cbsnews.com/news/donald-trump-rolls-out-the-expletives-at-portsmouth-rally/ (accessed Jan. 30, 2018). For

more on candidate Trump’s policies, see Oliver Laughland, Spencer Ackerman, Julian Borger, Amanda Holpuch, Molly Redden, Oliver Milman, Dominic
Rushe, and Jamiles Lartey, “What Will President Donald Trump Do? Predicting His Policy Agenda,” Guardian, November 6, 2016,
https://www.theguardian.com/us-news/2016/nov/09/donald-trump-president-policy-immigration-agenda-healthcare (accessed Jan. 30, 2018).
8 Trump promised to build a wall at the US–Mexico border and referred to Mexican immigrants as “rapists.” See “Donald Trump Wants to Build a
Wall on the Border with Mexico. Can He Do It?” PBS, May 2, 2016, http://www.pbs.org/weta/washingtonweek/blog-post/donald-trump-wants-build-
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wall-border-mexico-can-he-do-it; and “Clip #1: Trump Calls Mexicans Rapists,” YouTube video, 1:17, posted by “John Miller,” July 4, 2016,
https://www.youtube.com/watch?v=TML2cApMueU (both accessed Jan. 30, 2018).
9 “Catalonia Crisis in 300 Words,” BBC News, December 22, 2017, http://www.bbc.com/news/world-europe-41584864; Steven Erlanger, “‘Brexit’:
Explaining Britain’s Vote on European Union Membership,” New York Times, October 27, 2016,
https://www.nytimes.com/interactive/2016/world/europe/britain-european-union-brexit.html; “Scottish Referendum: Scotland Votes ‘No’ to
Independence,” BBC News, September 19, 2014, http://www.bbc.com/news/uk-scotland-29270441; John Henley, “Marine Le Pen Promises Liberation
from the EU with France-First Policies,” Guardian, February 5, 2017, https://www.theguardian.com/world/2017/feb/05/marine-le-pen-promises-
liberation-from-the-eu-with-france-first-policies (all accessed Jan. 30, 2018).
10 For Trump on bringing back manufacturing, see Reuters, “President Trump Tells CEOs He’s Going to Bring Millions of Jobs Back to America,”
Fortune, February 23, 2017, http://fortune.com/2017/02/23/donald-trump-jobs-america-ceos/; for Trump’s desire to end the “war on coal,” see Juliet
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Candidate Trump denounced China as a currency manipulator and cherished the United Kingdom’s decision
to leave the EU. He promised unilateral tariffs against Mexico, China, and the EU (while triggering pledges of
retaliation), and called the WTO a disaster.11
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Trump on Trade
Once in office, President Trump was keen to make good on some of his campaign promises. He was quick
to withdraw from the TPP agreement that his predecessor had painstakingly negotiated but failed to get
ratified.12 Many had seen the TPP as President Barack Obama’s response to China’s rising economic power
(which was not part of TPP). What would have been the largest trade deal in years (the original TPP would
have covered 35% of world trade, totaling $28 trillion) had been central to Obama’s “pivot to Asia.” Obama
wanted to become the first “Pacific” president. His aim was to rebalance America’s foreign policy away from
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Europe and the Middle East toward Asia, the presumed center of gravity of the 21st century.13 From this angle,
engaging the Pacific Rim was more than just an exercise in lowering tariffs (which, for some participants, were
already low), and in writing rules for foreign investment or intellectual property right protection. Access to a
large free trade area also meant spreading and locking in US industrial and regulatory standards that, in a world
of lower tariffs, were increasingly important.14 No doubt the EU saw its new trade deals in a similar light, as
vehicles to export its views, say, for example, on online privacy protection, and to defend regional trademarks
like feta cheese and champagne.15
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NAFTA, the agreement among Canada, the United States, and Mexico that only four years before had
celebrated its 20th birthday, was another item on Trump’s trade agenda. When President Bill Clinton signed it
into law, it was one of the most ambitious endeavors to eliminate internal tariffs since the European Customs
Union of the 1950s. President George H. W. Bush had initiated the NAFTA talks, which would go beyond
mere trade liberalizations, as NAFTA sought to promote foreign direct investment. NAFTA also wanted to
bring the agricultural sector into trade negotiations that, in line with rich countries’ interests, were often
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narrowly focused on enlarging markets for manufacturing products. Agriculture, with Europe’s Common
Agricultural Policy as exhibit A, was heavily protected and subsidized.
After Trump first threatened to void NAFTA with an executive order, he agreed to renegotiate. In the
ensuing meetings, the US negotiators were not intent on a compromise. As US Chamber of Commerce
President Tom Donahue argued, “There are several poison pill proposals…that could doom the entire deal.”16
US negotiators, for example, suggested a sunset clause to invalidate the agreement after five years in the absence
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of unanimous agreement to continue. They also wanted stronger rules of origin that defined which products
deserved the NAFTA preferential (zero) internal tariff. This was an attempt to ratchet up the percent of North
American (specifically US) content requirement for NAFTA products. Other fights with Canada also were
brewing. There was the antidumping case against Canadian lumber, and one against Canada’s Bombardier that,
Eilperin and Brady Dennis, “Trump Administration to Terminate Obama’s Climate Plan: ‘The War on Coal Is Over,’” Chicago Tribune, October 9, 2017,
http://www.chicagotribune.com/news/nationworld/politics/ct-trump-epa-clean-power-plan-20171009-story.html; for Trump tweeting about climate
change, see Donald J. Trump (@realDonaldTrump), “https://twitter.com/realdonaldtrump/status/265895292191248385?lang=en; for Trump on
China’s currency manipulation, see Ana Swanson and Damian Paletta, “Trump Says He Will Not Label China Currency Manipulator, Reversing Campaign
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Promise,” Washington Post, April 12, 2017, https://www.washingtonpost.com/news/wonk/wp/2017/04/12/trump-says-he-will-not-label-china-

currency-manipulator-reversing-campaign-promise/?utm_term=.acbbe60116f2
11 https://www.nbcnews.com/meet-the-press/meet-press-july-24-2016-n615706.
12 See https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text for the full text of the TPP (accessed Dec.
15, 2017).
13 Mike Green, “The Legacy of Obama’s ‘Pivot’ to Asia,” Foreign Policy, September 3, 2016.
14 “In Size and Stakes, the Trans-Pacific Partnership is a Big Deal,” PBS NewsHour, October 5, 2015, https://www.pbs.org/newshour/show/tpp
(accessed Dec. 15, 2017).

15 Donnan, “Globalisation Marches on without Trump.”
16 Phil Levy, “Trump May Be About to Blow Up the NAFTA Talks,” Forbes, October 10, 2017.
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according to Boeing, had sold planes made in the United Kingdom (a type that Boeing did not produce) for
too low a price.17
As Phil Levy from the Chicago Council on Global Affairs put it, Trump seemed to delight in keeping
others off-balance, yet whether this strategy would serve Washington well was not clear.18 As Levy further
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pointed out, it was not always clear what US priorities were and whether Trump understood the issues enough.
The most important exporter to the United States was a constant source of frustration for Trump. “We have
trade deficits with China that are through the roof,” he told reporters, “they’re so big and so bad that it’s
embarrassing saying what the number is.”19 Trump abandoned his campaign promise to declare China a
currency manipulator in light of China’s capital flight that accompanied slower growth. He, however, still
seemed bent on addressing the current account deficit with trade policy, the effectiveness of which many
economists questioned.20 He had a working group look into intellectual property rights protection, as well as
steel. The president explained: “Steel is a big problem…I mean, they’re dumping steel. Not only China, but
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others. We’re like a dumping ground, OK? They’re dumping steel and destroying our steel industry. They’ve
been doing it for decades, and I’m stopping it. It’ll stop.”21
As Levy pointed out, Trump’s statement incorrectly referred to antidumping, which was a well-established
WTO procedure widely applied for steel and against China. Antidumping did not involve the White House in
any way. Steel mills themselves filed a complaint with the US Commerce Department and US International
Trade Commission that determined whether goods were sold at less than fair value, and whether economic
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injury warranted countervailing (retaliatory) tariffs. The steel issue that most likely was on Trump’s mind,
however, was—according to Levy—the White House’s investigation into steel and aluminum imports as a
national security threat.22 This creative way of arguing for steel protection was novel under WTO rules, and
quite unusual from the point of view of the United States. China was not part of the top-10 list of US steel
importers. Moreover, the list included trusted allies such as Japan, Turkey, Germany, and South Korea, and it
was topped by US neighbor Canada. In addition, going the security route seemed to introduce even more
discretion in protection proceedings. Too many options seemed on the table. If one went by Trump’s
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pronouncements, China could even get a better trade deal with the United States if it pressured North Korea
more strongly in nuclear matters—a highly unusual link between diplomacy and international trade.
Bilateralism First
Trump, a self-described dealmaker, was not fond of large, multilateral deals. “What we will no longer do,
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is enter into large agreements that tie our hands, surrender our sovereignty and make meaningful enforcement
practically impossible,” he said at the Asia-Pacific Cooperation Forum on November 10, 2017.23 Multilateral
trade agreements tended to be technical and complex, going beyond handshakes or personal chemistry. As
multilateral agreements needed ratification by national parliaments, affected many people and industries, and
built on existing agreements, they required much consultation. They often took years to conclude. Moreover,
to protect delicate negotiations without endangering the later ratification, their fine print was often hashed out
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17 Julia Gregory, “US Escalates Trade Dispute with UK and Canada over Bombardier,” Guardian, October 6, 2017,
https://www.theguardian.com/business/2017/oct/06/us-escalates-trade-dispute-with-uk-and-canada-over-bombardier-jets (accessed Dec. 15, 2017).
18 Phil Levy, “Trump is Throwing China off Balance—That May Not Be Good,” Forbes, August 9, 2017.
20 See Ben Bernanke’s seminal Saving Glut speech at “The Global Saving Glut and the U.S. Current Account Deficit,” remarks by Ben S. Bernanke
at the Virginia Association of Economists, Richmond, Virginia, March 10, 2005,

https://www.federalreserve.gov/boarddocs/speeches/2005/200503102/ (accessed Jan. 30, 2018).
21 Phil Levy, “President Trump’s Steel Confusion,” Forbes, July 16, 2017.
22 Levy, “President Trump’s Steel Confusion.”
23 D. Sevastopulo and J. Reed, “Trump Talks Tough to Apec Leaders,” Financial Times, November 11, 2017.
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behind closed doors, and sometimes less-democratic procedures, like Fast Track in the United States, were used
to improve the chances of ratification of delicate agreements.24
Trump had a strong preference for bilateral agreements, but had not yet initiated any by January 2018. After
the United Kingdom’s Brexit decision, Trump sought to engage the United Kingdom in what he thought would
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be a “quick” deal.25 He reportedly also approached Germany, a country of concern to Trump with its chronic
trade surplus.26 Japan and South Korea were also on the radar, but according to Singapore’s prime minister,
Lee Hsien Loong, “I think [the Trump administration] believes that, bilaterally, you are bigger than any other
partner that comes along and so you get a better deal. As a result of which I think not that many partners will
be keen to deal with you bilaterally.”27
Trump’s lack of appetite for multilateral deals that constrained national sovereignty was not limited to
international trade. He used the discretion bestowed upon the presidency in international affairs and pulled the
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United States out of the Paris Climate Agreement. He took any opportunity to express his frustration with
NATO, the defense alliance the United States was part of, as well as with the United Nations (UN).28 Trump’s
dislike for multilateralism naturally translated into scorn for the WTO—in his own words, a “disaster”—and
he did mention the United States might have to renegotiate or pull out.29
In an interview with Fox News, Trump explained: “The WTO was set up for the benefit [of] everybody
but us…They have taken advantage of this country like you wouldn’t believe. (…) We lose the lawsuits, almost
all of the lawsuits in the WTO.”30 Trump was referring to the WTO’s dispute settlement resolution, or how the
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WTO handled violations of trade rules. The administration’s trade representative, Robert Lighthizer, had
criticized dispute settlement for a long time. In the 1990s, he suggested the United States leave the WTO if it
lost three rulings in five years. He pushed the view that the WTO and its predecessor failed to rein in the
international trading system: “The sheer scale of [China’s] coordinated efforts to develop their economy, to
subsidize, to create national champions, to force technology transfer, and to distort markets in China and
throughout the world is a threat to the world trading system that is unprecedented.”31 Lighthizer even went as
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far as to claim that China’s membership of the WTO was a mistake.32
As of 2017, Trump’s anti-WTO rhetoric had not given way to much action. The administration did block
the appointments for two vacancies on the appellate body that ruled in the WTO trade dispute process. Some
commentators worried that such bureaucratic steps could be the opening salvo in an effort to neutralize the
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24 Fast Track authority was meant to facilitate the delicate balance among specific domestic interests, international commitment, and ratification.
Through Fast Track, Congress gave the president the authority to negotiate a trade deal, and while final approval rested with Congress, it could only vote
for or against the treaty, without modifying the treaty once it was up for ratification. Interestingly, the implicit assumption of Fast Track and much of
the trade policy tradition in the United States was that the president would be more focused on liberalizations and the country’s overall interests, whereas
Congress would be guided by special interests and have protectionist instincts. See Douglas Irwin, Free Trade under Fire (Princeton, NJ: Princeton
University Press, 2002).
25 Phil Levy, “Why a US–UK Trade Quickie is Very Unlikely,” Forbes, July 9, 2017.
26 L. Pasha-Robinson, “Angela Merkel ‘Had to Explain Fundamentals of EU Trade to Donald Trump 11 Times,’” Independent, April 24, 2017; W.
Jacoy, “President Trump Just Threatened Germany over Trade. Here’s What You Need to Know,” Washington Post, May 30, 2017.
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28 Jeremy Diamond, “Trump Scolds NATO Allies over Defense Spending,” CNN, May 25, 2017,
https://www.cnn.com/2017/05/25/politics/trump-nato-financial-payments/index.html; Maya Rhodan, “Here Are All the Times Donald Trump
Bashed the United Nations before Speaking There,” TIME, September 18, 2017, http://time.com/4946276/donald-trump-united-nations-general-
assembly/ (both accessed Jan. 30, 2018).
29 https://www.nbcnews.com/meet-the-press/meet-press-july-24-2016-n615706.
30 Donnan, “Fears for Global Trade.”
31 Donnan, “Fears for Global Trade.”
32 Shawn Donnan, “U.S. Says China WTO Membership Was a Mistake,” Financial Times, January 19, 2018, https://www.ft.com/content/edb346ec-
fd3a-11e7-9b32-d7d59aace167 (accessed Jan. 30, 2018).
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dispute resolution system.33 If more appointments were blocked, they argued, too few judges might be left to
go forward with settling conflicts involving the countries of origin of the remaining judges.
GATT/WTO in a Nutshell34
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Illustrating the critical role of the United States, the years since 1945 were often called the Pax Americana
or American World Order. Together with the International Monetary Fund (IMF), the World Bank (WB), the
UN, and the North Atlantic Treaty Organization (NATO), the GATT was founded in the aftermath of the war
and was one of the pillars of that world order. Since their formation, all of the organizations (except for NATO)
saw their membership expand dramatically, from initially barely more than 20, mostly European members, to
virtually all nations of the world. They all faced severe challenges over the years, such as the end of the Cold
War for NATO, or the end of Bretton Woods for the IMF. Would the Trump presidency constitute a major
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challenge to the WTO, and to what it stood for?35
The IMF, WB, and GATT (WTO) embodied economic liberalism. The IMF promoted global
macroeconomic cooperation, the WB long-run economic development, and the GATT/WTO trade
liberalizations. Like many other UN institutions, the IMF and WB were slow to provide a larger role (e.g.,
increase voting rights for the board of governors) to fast-growing and increasingly more important emerging
economies such as India and China.36 As a provisional organization that was steeped in practical negotiations,
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the GATT was a slightly different organization. It stood in for the International Trade Organization, of which
GATT was meant to be a part, but that was never ratified. It employed far fewer people than the IMF or WB,
had a much smaller budget, and had virtually no independent, supranational power. It was very much a forum
for trade policy where the rules were written by the member governments. In this vein, it (like the WTO) went
by one country, one vote. In its defense, one could argue that the WTO was more focused than its sister
organizations.37
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The GATT emerged from the concerted effort to undo the economic beggar-thy-neighbor policies of the
interwar years. Those were triggered by the downturn after the stock market crash and the drastic tariff increases
of the 1930 Smoot-Hawley bill. These circumstances triggered a tariff war to which Europe responded by
increasing its tariffs, which exacerbated the Great Depression (see Exhibit 4). After the war, GATT provided
a framework to lower tariffs over multiple rounds of negotiations (see Exhibit 5). Those trade rounds were
ever more ambitious.38 The Kennedy round was an important marker as countries agreed on an across-the-
board tariff reduction goal, as opposed to line-by-line negotiations.
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As average tariff barriers decreased and GATT membership grew, negotiations moved into nontariff
barriers and government procurement, and also touched on topics beyond the GATT mandate: services and
intellectual property rights, among others. The move beyond tariff reductions was perhaps inevitable. Reducing
tariffs by 30% or 40% sounded more impressive than it was, especially when average tariff rates were already
as low as 6% before the last round (Uruguay). With ever more countries involved and ever more issues at stake,
trade rounds took more time to conclude. The Uruguay round, one of the most consequential trade rounds
33 “America Holds the World Trade Organisation Hostage,” Economist, September 23, 2017; Shawn Donnan, “WTO Chief Warns of Risks to Trade
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Peace,” Financial Times, October 1, 2017.

34 For a discussion, see P. Krugman, M. Obstfeld, and M. Melitz, International Economics, Theory and Policy, Addison-Wesley, Chapters 10–12; K. Bagwell
and B. Staiger, The Economics of the World Trading System (Cambridge, MA: MIT Press, 2002); J. McLaren, International Trade (New York, NY: Wiley, 2013);
and B. Hoekman and M. Kostecki, The Political Economy of the World Trading System, From GATT to WTO (Oxford, UK: Oxford University Press, 1995).
35 Obama was very critical of trade before taking office, and in the wake of the financial crisis, his 2009 stimulus included “buy America” provisions.
36 Thomas Henriksen, “Post-American World Order,” Hoover Institution, March 23, 2017, https://www.hoover.org/research/post-american-world-
order (accessed Dec. 15, 2017).

37 In 2017, the WB had about 10,000 employees; the IMF 2,400; and the WTO 500.
38 Note that not all of the tariff reductions for the United States were due to GATT negotiations. Some tariffs were in dollar amounts (not percent)
that were not adjusted for inflation.
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that gave way to the WTO, started in 1986. It was, according to Irwin, also the first round in which developing
countries actively participated.39 The round concluded eight years later. Some compared trade liberalization’s
gradualism and the subsequent rounds of negotiations with cycling: “You need to keep doing it, otherwise, you
fall off (your bike) and end up with protectionism.”40
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First and foremost, the GATT was a rule-based international organization. Countries agreed on a set of
rules by which subsequent tariff negotiations must abide. This created a stable and predictable environment for
expanding international trade that avoided trade wars. It was conducive to trade negotiations attractive enough
for smaller economies to be engaged. The GATT was guided by a few key principles:
 Not surprising for a multilateral organization, nondiscrimination was at the heart of GATT. The GATT
had countries bind their tariffs (beyond which they could not be raised). Countries would extend their
lowest tariff to all trading partners, which is the most-favored-nation (MFN) principle. It ensured
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economically efficient tariff reductions.
 The principle of reciprocity complemented nondiscrimination and stemmed from the practice of
negotiating.41 Countries sought to achieve a “balance of concessions,” so that “changes in the volume
of each country’s imports [were] of equal value to changes in the volume of its exports.”42 No country
made unilateral concessions. While some argued reciprocity was unnecessary, the principle eased the
political process, and made sure not just importers, but also exporters, came to the negotiation table.

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The principle of national treatment highlighted another dimension of nondiscrimination. Countries
committed to treating foreign products (once inside the borders) in the same way as comparable
domestic products. In other words, safety requirements, for example, could not be higher for foreign
products.
There were a number of important exceptions and modifications to these principles:

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 Free trade agreements and customs unions with preferential conditions only for members were allowed
when they led to free trade among members, did not imply tariff hikes for nonmembers, and were
reported to GATT and in accordance with its rules (see Exhibit 6). This violation of nondiscrimination
opened the door for the European community as well as NAFTA and many preferential agreements
since (see Exhibit 7). The Generalized System of Preferences (GSP), with preferential access for
developing countries to developed country markets, also belonged here. It was an open debate as to
whether exceptions to MFN were building or stumbling blocks for bringing about future multilateral
deals.43
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 Antidumping or countervailing duties could be imposed if an exporting firm from another country was
found dumping. Applications for such duties increased significantly as tariff levels decreased. Initially,
only advanced countries applied them, but since the 1990s, developing countries also wanted to impose
them (see Exhibit 8 for countries that most commonly applied or received antidumping tariffs). Trade
rounds did not successfully rein in the tit-for-tat of antidumping.
 The escape clause allowed a country to suspend its tariff concession temporarily if it had seen a surge
in imports and had suffered material injury. Exceptions for the protection of life, health, or natural
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resources were also allowed.
39 Irwin.
40 Dani Rodrik, “Trade Policy as Riding Bicycles,” Dani Rodrik’s Weblog (blog), July 20, 2007,
http://rodrik.typepad.com/dani_rodriks_weblog/2007/07/trade-policy-as.html (accessed Feb. 5, 2017).
41 Bagwell and Staiger, 6.
42 Bagwell and Staiger, 6.
43 Note that the GATT was generally more flexible in terms of commitments for developing countries.
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From GATT to WTO44
The Uruguay round laid the foundation for the WTO, which put the provisional GATT on firmer
institutional footing. The agreements that the WTO oversaw reached beyond the ambitions of the GATT,
which had narrowly focused on manufacturing tariffs. Trade negotiators now targeted services (general
rP
agreement on trade in services, or GATS), as well as agriculture, apparel, and textiles.45 In addition, more
attention went to foreign direct investment, intellectual property rights (trade-related aspects of intellectual
property, or TRIPS), and issues related to health, safety, and environmental regulation.
And where from here?
The WTO got off to a rocky start. The ministerial meeting in Seattle, meant to launch a new trade round,
was met with protests, violence, and rising concerns by civil society over labor and environmental standards,
yo
equity, and transparency. Eventually, the first WTO trade round was launched in Doha, Qatar, in 2001. After
years of trying, it came to a standstill. The round was referred to as the development round, as it was meant to
address developing countries’ concerns that related to protectionism and subsidies in developed countries’
agricultural sector, and reducing antidumping and countervailing duties by advanced economies. In the end,
the United States, and in particular Japan and Europe, were not willing to make many concessions. Krugman
and coauthors attributed Doha’s failure to the success of previous negotiations, which had limited the potential
gains for further trade reductions. In particular, as reductions in agricultural protections were politically
unpopular in rich countries, they would require deep cuts in already lower manufacturing tariffs for developing
op
countries.46 Others, like Rodrik from Harvard, had already for some time argued that globalization was pushed
too far (hyperglobalization, he called it), and that countries needed to be able to adjust to national concerns and
national political realities. He argued that international economists should carefully study what brought Trump
to power.47
In spite of the failed Doha round, the WTO changed the international order in a major way. In 2001, after
tC
a decade of negotiations, China was brought into the WTO, whose members had to agree to transparency and
to follow the rules. As Rodrik argued with respect to Mexico’s participation in NAFTA, committing to trade
rules could enhance the governance and credibility of liberalizing countries.48 Ever since its entry to the WTO,
China’s trade had soared. China’s trade in the first decade of the 21st century, like the trade of South Korea,
Taiwan, Hong Kong, and Singapore in the 1990s, rewrote economic history.49 The phenomenal GDP growth
that accompanied the liberalizations indicated that at a minimum, there was an alternative model of
development beyond infant industry protection. The rapid growth of trade with emerging economies, however,
No
fueled strong antitrade sentiment in the United States and other countries.
The WTO also affected international trade through its new dispute settlement system. Cases no longer
dragged on as under the GATT. A panel of experts heard cases, and came relatively swiftly (often within a year!)
to a conclusion. It was no longer possible for countries to block unfavorable reports. Also, small countries (e.g.,
Costa Rica in 1995 against the United States) could win complaints.50 In 2015, the WTO received its 500th
dispute to settle.51 In case a country was found to violate WTO rules and refused to make amends, the WTO
Do
44 For a good discussion of WTO, see Irwin, chapter 6, “The World Trade Organization and New Battlegrounds.”
45 The Uruguay round scheduled to phase out the multifiber agreement that consisted of bilateral export and import restraints for apparel and textiles.
46 Krugman et al., 243–45.
47 John Judis, “What’s Wrong with Our System of Global Trade and Finance,” TPM Café (blog), June 9, 2017,
http://talkingpointsmemo.com/cafe/whats-wrong-system-global-trade-finance (accessed Dec. 15, 2017).
48 Rodrik, “The Limits of Trade Policy Reform in Developing Countries.”
49 Krugman et al., 263–268.
50 Irwin, 189.
51 https://www.wto.org/english/res_e/booksp_e/anrep_e/anrep16_chap6_e.pdf. These are 500 cases over 20 years, compared to 300 for the GATT
over 47 years.
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could not force it to act. However, the country that had complained was granted the right to retaliate in a
measured way. As noted, some countries did not appreciate this constraint on their national sovereignty.
Questions
1. Why does Donald Trump prefer bilateral to multilateral trade deals? Why would Germany, the United
rP
Kingdom, and Japan be reluctant to engage Trump’s suggestion of starting a bilateral trade agreement
with the United States?
2. What are some of the advantages of multilateral deals versus bilateral deals?
3. Krugman once described free trade agreements as politically easy, but administratively a challenge.
Customs unions, on the other hand, are politically difficult, but administratively easy. Explain.
yo
4. What explains the proliferation of preferential trade agreements in recent years?
5. Is the WTO a disaster?
6. Why would some claim that reciprocity is not necessary?
op
tC
No
Do
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Exhibit 1
World Trade as Share of World GDP
rP
0.7
0.6
0.5
0.4
yo
0.3
0.2
0.1
0
1945 1955 1965 1975 1985 1995 2005 2015
op
Source: All exhibits created by author. Data from Penn World Table 8.1.
Exhibit 2
tC

Manufacturing Share of GDP in the United States (1947–2015)
30.0
No
25.0
20.0
15.0
10.0
5.0
Do
0.0
1945 1955 1965 1975 1985 1995 2005 2015
Data source: GDP-by-Industry Data, Bureau of Economic Analysis, US Department of Commerce.
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Exhibit 3
US Current Account Deficit as Percentage of GDP
rP
2
0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
‐1
yo
‐2
‐3
‐4
‐5
op
‐6
Data source: St. Louis Federal Reserve.

tC
Exhibit 4
Average Tariffs for Select Countries, 1913–2016
No
Country 1913 1925 1931 1952 1988 2016

Belgium 6 7 17 n.a 4.7 2.6
France 14 9 38 19 4.7 2.6
Germany 12 15 40 24 4.7 2.6
Italy 17 16 48 24 4.7 2.6
United Kingdom n.a 4 17 17 4.7 2.6
United States 32 26 35 9 4.6 2.7
Do
Data source: Data before 1988 from Douglas Irwin, Free Trade under Fire (Princeton, NJ: Princeton University Press,
2002), 153, Table 5.1. Data for 1988 and 2016 from World Bank, “Tariff Rate, Applied, Simple Mean, All Products (%),”
2017, https://data.worldbank.org/indicator/TM.TAX.MRCH.SM.AR.ZS (accessed Jan. 31, 2018).
Page 12 UV7539
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Exhibit 5
Multilateral Trade Negotiations, 1947–95
rP
Round Period Contracting Subjects Outcomes
Countries
Geneva 1947 23 Tariffs: item-by-item negotiations GATT established; 20% tariff
reduction; 45,000 tariff line concessions
Annecy 1949 29 Tariffs: item-by-item negotiations Modest (2%) tariff reductions
yo
Torquay 1950–51 32 Tariffs: item-by-item negotiations 8,700 tariff line concessions (about 3%)
Geneva 1955–56 33 Tariffs: item-by-item negotiations Modest tariff reductions (2.5%)
Dillon 1960–61 39 Tariffs: item-by-item 4,400 tariff reductions (4%); negotiation

negotiations; proposal: 20% of external tariff EEC
op
across-board tariff reduction
Kennedy 1963–67 74 Formula approach for tariff Average 35% tariff reduction by
reductions, supplemented by developed countries; 30,000 line
item-by-item negotiations, reductions of bound tariffs;
nontariff issues, antidumping, antidumping and customs valuation
tC
customs valuation agreement
Tokyo 1973–79 99 Formula approach for tariff Average 33% tariff reduction by
reductions; nontariff issues; developed countries; codes of conduct
antidumping; government on specific nontariff measures
procurement; product standards;
safeguards
No
Uruguay 1986–94 117 by end Formula approach + item-by- Average 33% tariff reduction by
of 1993 item tariff reductions; nontariff developed countries; agriculture and
measures; trade-related textiles brought in; GATT creation;
investment measures; rules of WTO with GATS, TRIPS, Tokyo
origin. New issues: trade in round conduct enhanced
services; IPR; dispute resolution,
transparency of surveillance of
trade policy measures.
Do
Doha 2001– Agriculture
Data source: Based on B. Hoekman and M. Kostecki, The Political Economy of the World Trading System, From GATT to WTO (Oxford, UK: Oxford
University Press, 1995), Table 1.2, 16–17; Douglas Irwin, Free Trade under Fire (Princeton, NJ: Princeton University Press, 2002), Table 5.3, 164.
Page 13 UV7539
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Exhibit 6
Free Trade Agreements versus Customs Unions
rP
Common: Abolishing internal barriers
Different: Customs unions: Common external tariff
Free trade agreements: Different external tariffs + rules of origin to define what percent of
local content defines a domestic product
yo
Examples: Customs unions: European Customs Union, Mercosur
Free trade agreements: NAFTA, TPP

op
Exhibit 7
Number of Preferential Trade Agreements Worldwide
tC
300
250
200
150
No
100
50
0
1958 1968 1978 1988 1998 2008
cumulative FTAs new FTAs
Do
Data source: World Trade Organization, Regional Trade Agreements Information System (RTA-IS),
http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx.
Page 14 UV7539
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Exhibit 8
Antidumping Complaints against Exporters
rP
Rest of World
United States
South Korea
South Africa
Argentina
Australia
Canada
Mexico
Turkey
China
Brazil
Total
India
Exporter vs. reporter
yo
Brazil 40 5 1 8 10 5 1 12 11 93
China 76 25 67 29 152 23 38 21 71 111 253 866
European Union 5 22 46 1 9 83
India 10 10 5 7 4 3 12 11 18 44 124
Indonesia 5 9 4 4 3 25 4 1 5 9 13 42 124
Japan 5 8 2 4 35 26 17 2 1 25 21 146
Korea, Republic of 12 20 12 11 29 45 3 16 7 25 59 239
op
Malaysia 2 6 1 3 22 5 3 8 5 28 83
Russian Federation 2 1 5 3 9 19 3 6 2 5 7 53 115
Taipei, Chinese 12 9 12 6 14 48 4 3 6 10 23 44 191
Thailand 5 13 9 3 5 32 3 4 12 10 44 140
United States 7 6 23 11 36 30 9 23 6 4 22 177
Rest of the World 65 40 91 54 28 156 16 30 56 41 146 146 869
tC
Total 241 137 241 135 192 609 88 120 137 179 395 931 3405
Data source: WTO statistics on antidumping.

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https://www.youtube.com/watch?v=W3LvZAZ-HV4 (accessed Jan. 30, 2018).

News, February 5, 2016, https://www.cbsnews.com/news/donald-trump-rolls-out-the-expletives-at-portsmouth-rally/ (accessed Jan. 30, 2018). For

Promise,” Washington Post, April 12, 2017, https://www.washingtonpost.com/news/wonk/wp/2017/04/12/trump-says-he-will-not-label-china-

(accessed Dec. 15, 2017).

at the Virginia Association of Economists, Richmond, Virginia, March 10, 2005,

far as to claim that China’s membership of the WTO was a mistake.32

27 Donnan, “Globalisation Marches on without Trump.”

fd3a-11e7-9b32-d7d59aace167 (accessed Jan. 30, 2018).

Peace,” Financial Times, October 1, 2017.

order (accessed Dec. 15, 2017).

that were not adjusted for inflation.

There were a number of important exceptions and modifications to these principles:

resources were also allowed.

And where from here?

Trump Says the WTO Is a Disaster

Data source: GDP-by-Industry Data, Bureau of Economic Analysis, US Department of Commerce.

Data source: St. Louis Federal Reserve.

Country 1913 1925 1931 1952 1988 2016

Annecy 1949 29 Tariffs: item-by-item negotiations Modest (2%) tariff reductions

Geneva 1955–56 33 Tariffs: item-by-item negotiations Modest tariff reductions (2.5%)

Dillon 1960–61 39 Tariffs: item-by-item 4,400 tariff reductions (4%); negotiation

customs valuation agreement

Doha 2001– Agriculture

Different: Customs unions: Common external tariff

Free trade agreements: NAFTA, TPP

Data source: WTO statistics on antidumping.

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